Shares of SolarWorld AG rallied nearly 9% in Frankfurt trading Monday after the firm was upgraded to neutral from underperform at Credit Suisse, which said there was "too much upside risk." "Demand in Germany has meaningfully recovered following...

SolarWorld AG produces and markets solar panels and silicon wafers for solar applications. The company has developed from a trading company to a solar company with an integrated solar value chain process - from raw materials to the solar wafer, the solar cell, the solar module and high-quality solar power plants.[1]

At the time of its IPO in 1999 SolarWorld AG was among the very first solar stocks worldwide. Investors were quick to recognize the potential of solar power technology at an early point in time. In the last ten years SolarWorld AG has developed from a solar trading house into one of the world’s largest manufacturers of high-quality crystalline solar power technology.

Company Overview

German based SolarWorld operates in all aspects of the solar production market including the procurement of raw silicon, processing it into silicon wafers and the final production into solar cells and panels. The company's headquarters and largest production site is located in Freiberg, Germany. It also has several other production sites in Germany, along with ones in the U.S., Spain, South Africa and is beginning operations of a plant in South Korea as part of a joint venture, SolarWorld Korea Ltd.[2] A majority of SolarWorld's German operations are under the names of fully owned subsidiaries, Deutsche Solar AG and Deutsche Cell, as well as its raw silicon processing group, Sunicon, while the international facilities operate under the SolarWorld name.[3]

Solarworld's shipments rose versus the same period of the previous year by 22 per cent to 139 MW. Consolidated revenue increased by 28 per cent to EUR 225.6 million. Earnings before interest and taxes (EBIT) amounted to EUR 24.8 million compared to EUR 37.8 million in the first quarter of 2009. Earnings before interest, taxes, depreciation and amortization (EBITDA) ran to EUR 44.0 million compared to EUR 52.5 in the first quarter of 2009.

Business Segments

Modules and Trading

The sale of solar panels and modules through SolarWorld's trading segment make up 75.5% of its revenue. The silicon wafer and solar cell segments of the company operate primarily to supply the required cells for panel and module production. This allows SolarWorld to avoid the supply issues faced by other solar panel manufacturers, and eliminates the need for long-term supply deals.

Silicon Wafers

Germany is SolarWorld's primary market for solar panels, but plays only a small role in its sale of silicon wafers. Although a majority of its total revenue came from sales within Germany, only 10% of the silicon wafers sold went to other companies within Germany. SolarWorld sold most of its silicon wafers to companies in faster growing markets, with 43% being sold to companies in Asia, 39% to other countries in Europe and 8% going to the Americas. All of the recycled and processed silicon produced by its silicon refining segment is used to make the company's silicon wafers.[6] The remaining 50% was sold to external sources.

Solar Cells

The purpose of the solar cell segment is primarily to supply SolarWorld with the cells that are needed for its solar panels, and not to earn profit on its own. The company produces cells that are on par with the rest of the silicon solar industry, having cell conversion efficiencies that average 15% and go as high as 17%.[7]

Trends and Forces

One of the most pressing issues associated with energy production is global climate change, caused by the warming of the earth's atmosphere. The vast majority of climate scientists agree that global warming is human-caused and can be stopped by drastically reducing the amount of greenhouse gas (carbon dioxide, ozone, water vapor, etc.) emissions.[8] Education on the issue is creating pressure for governments and energy companies to regulate greenhouse emissions. This movement is having a worldwide impact on energy regulation in the form of increased government subsidies for clean energy sources and global emissions caps. SolarWorld is well positioned to take advantage of this trend in the long run.

As the public pushes for better climate and energy independence policies, many governments are investing in alternative energy development in the private sector. Solar power companies could reap these rewards through the receipt of subsidies and tax breaks. Increasing fear of global warming and pollution damage has led to social support for clean energy sources. In response many governments have implemented legislation that could indirectly lead to increased revenues for SolarWorld. Examples include:

California's mandate that 25% of electricity will come from clean sources by 2020 and 75% by 2050

A bill passed through the U.S. Congress mandating that 20% of the United States' electricity come from clean sources by 2020

The European Union passed a binding target of purchasing 20% of all energy from renewable sources by 2020[9]

China's Renewable Energy Law is planning on raising the total percentage of renewable energy used in the country to 10% by 2020

Solar is not an economic choice in today’s energy market due to the low efficiency of available panels and a very large initial investment of approximately $8,000 US per kilowatt(kW) installed.[10] This dwarves the installation costs of natural gas at $1200 - $1600 per kW installed[11] and even an emissions controlled coal plant that costs $2,200 - $3,700 per kW installed.[12] Another renewable source, wind, has installation costs that can vary from $800/kW for large installations[13] to $3500/kW for small installations.[14] The larger initial installation costs and uncertainty about the panels’ longevity deter most electric generators from investing in solar power plants. Other, more conventional electric sources, such as coal and natural gas, have proven to be more predictable and cost effective as companies have much greater control over their power output. As a result, commercial and private PV systems are reliant on subsidies and other government incentives to make them economical. These incentives have been spurred by rising energy prices, fears of climate change, and desires for energy independence.

In Germany, SolarWorld’s largest market, the Feed-In-Law provides subsidies for solar generated electricity that began in 2004 at 45.7 euro cents/kWh for ground and 57.4 euro cents/kWh for building installations, set to decrease at a rate of 6.5% and 5% per year, respectively.[15] In early June of 2008, the German government changed the 2004 law to have a 10% decrease in 2009, and a 7 and 8 percent decrease the following years. This sets the subsidy levels for 2009 installations at about 34.2 and 48.8 euro cents/kWh.[16] Spain, another significant player in Europe’s solar market, has seen similar cuts in its Feed-In-Law, suggesting other countries may follow suit.[17] Although the lower subsidies will do less to encourage growth, the decreases have been less than anticipated, and the subsidies will continue to make solar more competitive in the energy market.[16]

SolarWorld Stands to Benefit from Chinese Growth

SolarWorld already sells 43% of its silicon wafers to customers in Asia and is expanding its production capabilities in South Korea to better position itself in the growing market. According to the International Energy Agency (IEA), China's energy demand will surpass that of the United States in 2010, based on what it considers a conservative growth rate of 6.0% per year. [18] Chinese energy demand is expected to grow by 3.2% every year and double between 2005 and 2030, with potentially higher growth rates resulting in even greater energy demand.[18] To meet the growing needs, China will need to add 1,300 gigawatts to its electric generating capacity by 2030, more than the total installed capacity in the United States in 2008.[18] To meet this demand, China will need to invest 3.7 trillion dollars in energy infrastructure to meet the energy needs in 2030.[18] To meet these goals, the Chinese government has said it hopes that installed solar installations will generate about 300 megawatts of solar power for the country by the end of 2010.[19]

With the drastic oil price fluctuations seen in 2008 and the increased public attention to the environment, there has been a strong push for the development of reliable economic alternatives, especially in the renewable energy sector. The push for clean energy has benefitted the solar industry, which has averaged 41% growth per year from 2001 through 2008, and is projected to continue in the future. 90% of solar panels, like the ones produced by SolarWorld, are silicon based, [20] and although thin-film technology is growing in popularity, the needs of the rapidly expanding solar industry provide ample opportunity for silicon-based manufacturers to continue their growth. According to the Department of Energy’s Solar America Initiative, with continued investment PV solar power will likely become a competitive source of commercial electricity by 2015.[21]

During the first quarter of 2010, the oil price (WTI crude grade) again increased significantly versus the same month of the previous year to $81 per barrel, compared to $48 in March 2009.[5] About one third of the German utilities increased their prices for domestic electricity by an average of six per cent in the first quarter.[5] However, the majority kept electricity prices constant in the first quarter.[5] In the U.S. the average price for domestic electricity dropped by almost three per cent versus the first quarter of the previous year according to an estimate of the Energy Information Administration.[5]